Limited Liability Partnership

Quick Summary of Limited Liability Partnership

A type of partnership recognized in a majority of states that protects a partner from personal liability for negligent acts committed by other partners or by employees not under his or her direct control. Many US states restrict this type of partnership to professionals, such as lawyers, accountants, architects and healthcare providers.

A limited liability partnership is a form of joint corporate organization. A limited liability partnership provides that losses resulting from liability are limited to the capital invested. Therefore, in a limited liability partnership, each partner’s liabilities may only amount to the extent of his or her investment in a given business venture. That means that no partner of a limited liability partnership will sustain looses to personal assets. It also means that a limited liability partnership will shield a partner from any tax, debt, or other liability that may be imposed by negligent acts or malpractice of other partners. Partners of a limited liability partnership are not entitled to receive dividends. However, a limited liability partnership structure is often preferred because in a limited liability partnership co-owners are each at liberty to isolate themselves from company debt liability.

Limited Liability Partnerships (LLP’s) are the most recently introduced business structure. They may be seen as a combination of previous Limited Partnerships and Limited Liability Companies. The reason for this being is that they allow the flexibility of a partnership whilst offering the liability protection of a company. They were introduced by the Limited Liability Partnership Act 2000.

What are the main features of an LLP?

• The members of an LLP have limited liability.
• The LLP is a separate entity distinct from its members.
• There are no restrictions on the activities of an LLP.
• An LLP has members. There are no directors or shareholders.
• An LLP has complete flexibility in terms of internal structure.
• LLP’s need to maintain accurate records and accounts that need to be submitted to Companies House.
• There needs to be two or more designated members.

What are the benefits of an LLP?

As the name implies one of the main advantages of an LLP is that the members can limit their personal liability. Therefore in the event of the business-facing difficulties, the member’s personal assets are protected as the liabilities are that of the LLP as a separate legal entity.

Any contributions towards liability of the members of an LLP should be agreed between members or with the LLP. This can be a nominal amount or even zero.

There is internal flexibility especially for the founders of the LLP. Income, voting rights etc. can be clearly expressed in a members agreement.

What are the disadvantages of an LLP?

Anyone lending money to the LLP such as a bank may still require personal guarantees from the members, as they frequently do with shareholders in a company.
If you are converting an existing partnership to an LLP the bank’s consent will be required to transfer overdrafts and borrowings of the partnership to an LLP.
LLP’s are required to publish and submit accounts for the public record. Some partnerships may find this unacceptable.

To what extent is your liability limited? Because LLP’s are relatively new, there is little case history examining the extent of liability.

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